The Whale That Should Not Have Gotten Away

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A London office of JPMorgan Chase. Last month, federal prosecutors in Manhattan moved to dismiss all criminal charges against two former bank employees in the “London Whale” trading case.CreditCreditNeil Hall/Reuters

By William D. Cohan

Aug. 16, 2017

The editorial board of The Wall Street Journal has asserted that bankers and traders didn’t go to jail for their bad behavior in the years leading up to the financial crisis “because they haven’t committed any crimes.”

“Politicians and journalists have made careers of lamenting that too few bankers have been convicted of crimes,” the editorial writers said. “They overlook that, at least in America, to prove a crime you have to have enough evidence and that a mistake is not necessarily criminal.”

The Journal could not be more wrong. For reasons that remain mysterious and confounding, the truth is that contrary to the writers’ convoluted logic, bankers and traders did not go to prison, as certainly some should have, because federal prosecutors failed to even try to bring cases against them.

Make no mistake: There was plenty of wrongdoing on Wall Street in the years leading up to the financial crisis. The stories of malevolence brought to light by whistle-blowers like Richard M. Bowen III at Citigroup and Alayne Fleischmann at JPMorgan Chase have been well documented.

They blew the whistle about how their colleagues at the two banks knowingly lowered their credit underwriting standards with regard to the home mortgages they packaged into securities, which were then sold around the world as AAA-rated investments, even though they weren’t. The bankers were more than happy to get the fees for packaging up the mortgages into securities and selling them to unsuspecting investors.

Instead of the banks acting to correct the intentional wrongdoing that Mr. Bowen and Ms. Fleischmann revealed to their bosses — which is what you might expect to happen in cultures where wrongdoing is not tolerated – the two bankers were fired and their Wall Street careers ended abruptly.

These are not mere “mistakes,” as The Journal’s editorial writers would have us believe; this was intentional, ongoing wrongdoing. There are plenty more examples, too. The case of two Bear Stearns hedge fund managers — Ralph Cioffi and Matthew Tannin — was particularly instructive about how poorly federal prosecutors handled one of the very few cases they chose to pursue.

A decade ago, Mr. Cioffi and Mr. Tannin presided over the demise of two hedge funds that together had about $1.5 billion of investors’ money, after they invested heavily in various forms of risky mortgage-backed securities that they had pledged to their investors they would avoid. There is plenty of documentary evidence that points directly to their wrongdoing and shows they knew what they were doing was wrong and was different from what they had promised they would do. (Much of this is detailed in my 2009 book “House of Cards,” about the firm’s shocking collapse.)

In the fall of 2009, federal prosecutors in Brooklyn took Mr. Cioffi and Mr. Tannin to trial. For reasons that remain difficult to fathom, the prosecutors did not make enough of damning email and documentary evidence that showed how the two men misled their investors. A jury subsequently acquitted the two men.

Afterward, one juror expressed her wish that Mr. Cioffi and Mr. Tannin could invest her savings, even though they had just cost investors more than $1.5 billion. Prosecutors’ failure to win a conviction against Mr. Cioffi and Mr. Tannin seemed to send a chill through the Justice Department; shockingly, there would be no more prosecutions attempted in subsequent years related to the wrongdoing of bankers and traders on Wall Street.

The hook for The Journal’s screed was the recent decision of Joon Kim, the acting United States attorney in Manhattan, to drop charges against two former JPMorgan Chase traders involved in the “London Whale” trading debacle in 2012, when a group of traders lost some $6.2 billion after making big — and decidedly wrong — bets on derivatives using depositors’ money. They worked in a group at the bank responsible for investing depositors’ money that isn’t being lent out. Mr. Kim apparently decided to drop the case because a key witness was no longer reliable.

The Journal praised that decision, claiming it was a good one since “no customers’ funds were lost” and because the bank made $5 billion in profit during the second quarter of 2012.

But Jesse Eisinger, the author of a new book about the Justice Department’s failure to prosecute bankers, traders and executives in the aftermath of the financial crisis, said in an email that the “standard for fraud” is not whether customer deposits were lost (and they would have been for sure had all depositors demanded their money all at once), nor whether the bank made a profit during the quarter that the loss occurred. “That’s irrelevant,” he said. What’s important is that these men and women knew what they were doing was wrong.

Instead of a reason to celebrate, Mr. Kim’s decision to drop the London Whale case, which began under his predecessor Preet Bharara, really was another example of prosecutorial failure.

“They developed this case very slowly,” Mr. Eisinger said. He pointed out, too, that a 2013 report into the London Whale case by the Senate Permanent Subcommittee on Investigations showed that “higher ups knew about a problem and tried to cover it up.” He wrote that Ina Drew, the bank’s chief investment officer (who subsequently was relieved of her duties but was not prosecuted), told “underlings to fudge the marks” — the value at which traders assess complicated derivatives, and other securities on a bank’s books. The Senate report said that Ms. Drew asked one of the trader defendants to “start getting a little bit of that mark back … so, you know, an extra basis point you can tweak at whatever it is I’m trying to show.”

Mr. Eisinger wrote in a subsequent column for DealBook: “Any idiot working for her would know exactly what she meant: Create some rationale to manipulate the valuations to make things look better than they really are.”

The statute of limitations on the crimes committed by Wall Street bankers and traders has run out by now. There will be no further prosecutions. That failure remains a major scar on Eric H. Holder Jr.’s Justice Department and one that has never been fully explained.

But to dismiss the need for accountability for wrongdoing on Wall Street as some progressive fantasy is an insult to what justice is all about and an insult to the American people.